Adding Bushels, Counting Pennies

Stacking up scale tickets, checking bushel totals against acreage maps, filing elevator assembly sheets into folders, signing contracts, depositing checks, and ultimately, seeing the end-of-year balance on an operating loan. These are the things that a grain-farming operation can only do once harvest is complete and the daylight is short. In December, farmers swap tractor seats for desk chairs.

Individual results will vary for every field of every crop in every region of North America, but on an aggregate basis, the totals on the adding machines will show this hasn’t been a great year, income-wise. Certainly, many individual grain producers harvested a bumper crop of kernels, beans or berries in 2018, but the industry hasn’t harvested any bumper crop of dollars.

USDA’s Economic Research Service released farm income statistics on Nov. 30, showing inflation-adjusted 2018 U.S. net-cash farm income is forecast to be the lowest since 2009. The total figure is expected to be $93.4 billion, which is $10.9 billion (or 10.5%) less than we saw a year ago. Of course, there’s one area of income that’s expected to increase — direct government farm payments, which are forecast to reach $13.6 billion in 2018 (a 15.2% year-on-year increase), ostensibly including the “Market Facilitation Program payments to assist farmers in response to trade disruptions.”

Those are big overall numbers, but the numbers are similarly grim if we drill down to an individual level. There is no such thing as a perfectly representative “average” farmer, but let’s assume we’re looking at an operation with a 50/50 corn-and-soybean crop mix, which paid “average” input costs, according to USDA economists, then grew “average” U.S. yields, and sold all its corn and all its soybeans at the “average” cash prices on the median U.S. harvest dates for those crops.

In that case, for its 2018 soybean fields, the operation paid $443 per acre in total operating and overhead costs (an $8.51 breakeven), then it grew 52.1 bushel-per-acre (bpa) soybeans, and it sold those beans on Oct. 19 at the average U.S. cash price of $7.57 per bushel on that date, ultimately losing $0.94 per bushel, or $49.10 per acre.

Likewise, for its 2018 corn fields, the operation paid $682 per acre in total operating and overhead costs (a $3.81 breakeven), then it grew 178.9 bpa corn, and it sold that corn on Oct. 22 at the average U.S. cash price of $3.28 per bushel on that date, ultimately losing $0.53 per bushel, or $95.25 per acre.

USDA’s economists figure that a representative enterprise grows about 270 acres of corn and 270 acres of soybeans. If we extend this individual example using those acreage numbers, then the operation lost a total of $38,975 by growing row crops in 2018. The “average” loss for a 50/50 corn-and-soybean operation would be $72.18 per acre, looking only at input costs and market revenue, and not including things like government payments or taxes or interest or depreciation. Using similar basic arithmetic and back-of-envelope calculations, a 1000-acre row-crop operation would have lost $72,175 in 2018. And so on.

Now, this is not only the season for adding up totals for individual fields, individual operations and entire industries, but it’s also the season for doing some preliminary thinking about what we can do differently in coming seasons. To make a grain operation’s profitability look better in 2019, there are two types of changes that could be made: agronomy changes and marketing changes.

Even if corn prices stay below $4 per bushel, and even if the soybean trade scenario remains contentious during tariff negotiations, operationally-speaking an acre of grain production becomes more profitable if it can be grown using lower input costs, all other things being equal. The number one most effective way to lower input costs would be to lower land costs, followed by equipment costs, followed by fertilizer costs, followed by seed costs.

Alternatively, an acre becomes more profitable if it can produce more bushels, all other things being equal. If, for the same input costs, our “average” farmer had been able to grow 210-bpa corn or 60-bpa soybeans, then that farmer would have booked profits in 2018, even by selling those bushels at the relatively low harvest-timeframe cash prices.

And that brings us to the marketing changes that could lead to profitability. These marketing strategies are probably much easier to implement than whatever magical agronomical alchemy would grow more bushels with cheaper inputs.

Let’s assume our “average” farmer didn’t just sell the bushels over the elevator scale on the day of delivery, at the time of year when harvest pressure usually tends to dampen grain prices. Instead, a better strategy would have been to lock in some pre-harvest hedging (this is obvious in the hindsight of 2018, but it is also true in most years). Some of the corn bushels could have been sold in May above the cost of production — either by forward contracting directly at the elevator, by using hedge-to-arrive contracts, or by using independent futures hedges. Admittedly, many of the typical hedging timeframes in 2018 (like February or June) didn’t actually offer any better prices than what we saw as spot bids during harvest, but an average price of several pre-harvest hedge contracts made over the first half of the year still would been superior to harvest-time cash sales.

Similarly, pre-harvest hedging of soybean prices during the first four months of the year (before the trade war rhetoric began), could have contributed $1.50 per bushel more income to the operation and probably pulled the soybean acres into profitability, especially if those pre-harvest hedges also locked in local basis bids before the cash market seized up.

Other strategies for marketing changes in 2019 could include receiving income from long put-option positions or short call-option positions that hedge against downward grain market movement, or storing grain that’s hedged with a short futures position to lock in the carry structure of the market. Storing harvested grain now and hoping that prices will go up isn’t necessarily going to guarantee an improvement on the current profitability picture.

None of this is new news, of course. But seeing nationwide averages in stark numbers — 53 cents per bushel lost on corn production, 94 cents per bushel lost on soybean production — may be useful for individuals to benchmark their own results coming off their adding machines this month. Even more importantly, the numbers may be the wakeup call we need to be more proactive marketers when the next opportunities come.